Social Security case

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Goodstuff
Posts: 4
Joined: Fri Apr 21, 2023 3:42 pm

Social Security case

Post by Goodstuff »

Hello
Really like your planner. I've been trying to match output of a simple case where a $100 tax deferred starting portfolio (A) returns 10%/year. Social security is $10/year. No inflation, no taxes, no standard deviations. No other inputs are active. Spending policy is stable.

My proposed equation in first year (B) is: B = (A+(A*0.1) + 10). Early values are: 100 (starting year), 120, 142.

Output from the planner for these years is 100, 121, 144. In order to match planner output I must change my equation and apply 10% annual growth factor to $10 social security in the year it is distributed hence my matched equation becomes: B = (A+(A*0.1) + 10+(10*0.1)).

Is this correct?

thanks
jimr
Posts: 821
Joined: Thu Feb 28, 2008 6:48 pm

Re: Social Security case

Post by jimr »

That sounds right. Logically, portfolio withdrawals/additions happen at the beginning of the year and portfolio growth is calculated at the end of the year.

So in this case, it's as though the SS income gets added to the portfolio all at once on January 1st so it has the whole year to earn that 10% return.
Goodstuff
Posts: 4
Joined: Fri Apr 21, 2023 3:42 pm

Re: Social Security case

Post by Goodstuff »

Hi
Apologies in advance if I have missed this info somewhere else in the site. If so, please refer me ruthlessly to the correct spot. :) My question is:
When modeling RMD distributions, RMD distributed $$ are first used to fund expenses, correct? Then from my limited understanding it appears any excess is deposited into either the existing portfolio, or new taxable investment, or ??? Is it possible to instead re-direct the RMD excess into a tax-free portfolio (i.e. Roth account) since (in my case) this money has already been taxed upon its distribution? How would I set that up? Sorry for my confusion. TIA for your help.
jimr
Posts: 821
Joined: Thu Feb 28, 2008 6:48 pm

Re: Social Security case

Post by jimr »

Any RMDs that don't get used for expenses are automatically added to the taxable portfolio. Since the taxable portfolio is carried at a 100% cost basis,withdrawals from this portfolio are tax free.

To keep the tax basis of the taxable portfolio at 100%, portfolio gains are taxed fully in the year they are earned at the investment tax rate. This means the taxable portfolio never has any unrealized capital gains. All portfolio gains are fully taxed when they happen so withdrawals from the taxable portfolio don't incur any taxes due.
Goodstuff
Posts: 4
Joined: Fri Apr 21, 2023 3:42 pm

Re: Social Security case

Post by Goodstuff »

Thanks for your reply. By putting the excess into a taxable account gains are taxed. But If the excess was put into a Roth the gains would be protected, correct? How can I do this? Any wor-around workflow?
Thanks
jimr
Posts: 821
Joined: Thu Feb 28, 2008 6:48 pm

Re: Social Security case

Post by jimr »

There isn't a straightforward workaround for this unless you're not using the taxable portfolio for anything else. If only the RMDs are in the taxable portfolio, you can set the investment tax rate to zero.

But I'm confused about why you don't want the gains that the RMD earns to be taxed. I didn't think there was a way for RMDs to go into a tax free account once they're removed from the tax deferred account.
Goodstuff
Posts: 4
Joined: Fri Apr 21, 2023 3:42 pm

Re: Social Security case

Post by Goodstuff »

My thinking was to put unused, after-tax rmd
funds into my Roth. However there are 2 IRS rules that prevent me from doing so.
1) The yearly amount that can be put into a
Roth (outside a Roth conversion) can be no greater than the amount of our yearly earned income - which for us is $0.
2.) The yearly amount that can be put into a Roth is also limited by the total of all annnual income, including rmd’s. This year if that total exceeds ~ $200k, no amount can be placed in a Roth. After about yr 3 our rmd amount will exceed the cap.

So in a nutshell (outside a direct IRA-Roth conversion) we won’t qualify for putting any excess after-tax rmd funds into a Roth. Your current FRP totally covers our case.
jimr
Posts: 821
Joined: Thu Feb 28, 2008 6:48 pm

Re: Social Security case

Post by jimr »

Thanks for clarifying this. I was afraid I had missed a rules change or something.

There probably are some people still receiving earned income after their RMDs start, but I'd guess it's not a super likely situation.
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